1. The following shows the demands and marginal revenue in two markets, 1 and 2,

Question

1. The following shows the demands and marginal revenue in two markets, 1 and 2, for a price discriminating firm along with total marginal revenue, MRT, and marginal cost MC. For reference, P1 = 600 – 5Q and P2 = 400 – 5Q. a. Compare the demand conditions in each market; i.e. how do the two markets differ in their demand for the firm’s product? b. How much total output should the firm produce (for both markets combined)? How should that output be allocated between markets 1 and 2? (It would be easiest to copy and paste the picture above and draw directly on the picture using Insert, Shapes to do parts b and c.) c. What price should the firm charge in each market?

Explanation / Answer

a. The demand conditions in both the market differ to a great extent. In market 1, the consumer is willing to pay a much higher price for the same amount of quantity than in market 2. For instance, let's consider the case for 5 units of output.

Market 1 (Q=5)

P1 = 600- 5X5 = $575

Market 2 (Q=5)

P2 = 400 - 5X5 = $375

Therefore, for 5 units of output, the consumer is willing to pay much more in market 1 as compared to market 2.

b. Information is insufficient to answer this question - missing graphs. Information about marginal cost is necessary to answer this question. To calculate the total output, one needs to add the demand curves and marginal revenue curves horizontally, and then equate MR and MC for profit maximisation level. For allocation of quantities, the individual demand and MR curves should be compared.

c. Again, missing information. Once the quantities are determined as in part b, they can be inserted in the demand functions given in the question and hence, price can be determined. This has to be done in a similar manner as shown in part a. Simply insert the quantities in the functions one by one.

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